EMC: Today, Legato. Tomorrow, BMC?

July 10, 2003

EMC grabbed headlines on July 8 when it announced it would buy storage-software outfit Legato Systems (LGTO) for $1.3 billion. But a smaller deal that EMC (EMC) revealed less than a week earlier could eventually help the data-storage leader move into the larger systems-software market.

The less-trumpeted deal was EMC's customer and software swap with BMC Software in Houston. Under the terms, EMC will take over management of about 50 BMC (BMC) customers that use the company's Patrol Storage Manager software and eventually convert them to EMC tools. BMC agreed to resell EMC's software. Neither one disclosed financial terms of the pact.

LEARNING EXPERIENCE. The agreement makes sense for both sides: BMC's strength is in systems management -- helping to run a company's information-technology infrastructure. It has been struggling to develop software that could manage storage systems and counted only 50 customers for its storage tools. Yet most of those customers were using EMC hardware. So taking them on allows EMC to learn why they opted for Patrol over EMC's own ControlCenter product. Plus, it lets EMC improve ControlCenter and then sell it to BMC's 5,500 customers.

The story may not end there, though. Some analysts say it may be the first step toward a broader partnership -- maybe even a merger -- between the two outfits. BMC, with $1.3 billion in revenue for the year to Mar. 31, would give EMC entrée to the rest of the data business.

Some analysts believe that for EMC to be successful in storage management, it will have to be in systems management as well. "You have to manage all components of the system, not just storage," says one former EMC analyst. Now, EMC basically allocates storage, or provides digital file cabinets for data. Systems management also involves such issues as which programs are at the front of the line to access storage.

"LOOKING WARILY." If EMC moves in that direction, it will become a more direct competitor for IBM's (IBM) Tivoli software division and Computer Associates (CA). The two are neck-and-neck in the market, with Tivoli's share at 13.9% and CA's at 13.8%, according to IDC. "If [EMC and BMC] partner to offer a complete end-to-end enterprise management, the synergies there are very, very strong," says Nancy Marrone-Hurley, a senior analyst with Enterprise Storage Group in Milford, Mass. "If I were Computer Associates or IBM, I'd be looking at this relationship very warily." BMC and EMC declined to comment on any future plans.

Entering systems management would give EMC access to a market larger than that for storage-software market. Systems-software sales were $7.1 billion in 2002 and are projected to grow to $9.2 billion in 2006, according to Gartner Inc. Storage software was a $4.7 billion market in 2002, with sales estimated to hit $6.7 billion in 2007.

Tivoli declined to comment, but Computer Associates shrugged off the speculation. "It wouldn't worry us," says Peter Waterhouse, a vice-president and product strategist for CA's Unicenter brand. "With our very large installed base and 26 years of intellectual capital, that wouldn't phase us."

FAR FROM THE GOAL. Of course, a potential EMC-BMC combo wouldn't threaten the incumbents anytime soon. CA's revenue was three times that of BMC in the year to Mar. 31. IBM doesn't report Tivoli's sales separately. And both BMC and EMC have housekeeping to do. BMC has long been known as a mainframe shop, though it's moving more into making software for distributed, or client-server, systems.

EMC is struggling to rev up its own software sales. The Legato purchase will bring software's contribution to 23% of projected 2003 revenue of about $6 billion, but that's still short of EMC's goal of 30% by the end of 2004. The tough IT-spending environment, a lack of new blockbuster products from EMC, and the relatively immature state of storage-management software that runs on all devices are hindering software sales, says A.M. "Toni" Sacconaghi Jr., a senior analyst with Sanford C. Bernstein & Co. (see BW Online, 7/10/03, "Time to Stock Up on Storage Shares?").

EMC now faces the task of integrating Legato. But that won't stop it from shopping for software companies, says CEO Joe Tucci. BMC could be on that list. By Faith Arner in Boston